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The Politics of Flat Taxes

We study the determination of flat tax systems using a workhorse macroeconomic model of inequality. Our first result is that, despite the multidimensional policy space, equilibrium policies are typically unique (up to a fine grid numerical approximation). The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) generally low transfers. We discuss the role of three factors—the initial heterogeneity in sources of income, the mobility of income and wealth, and the forward-looking aspect of voting—in determining the equilibrium mix of taxes.

Keywords: Political Economy, Essential Set, Voting, Inequality, Incomplete Markets.
JEL Codes: D52, D72, E62.

Suggested citation: Carroll, Daniel R., Jim Dolmas, and Eric R. Young. “The Politics of Flat Taxes,” 2017. Federal Reserve Bank of Cleveland, working paper no. 14-42R.

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